CAPEX Q1 2016

Amidst market slowdown, Q1 2016 has started slowly with only USD 12.8bn worth of project spends. With little likelihood of a significant rise in crude oil prices in the near future, 2016 will certainly prove to be a challenging year for oil companies

The past 18 months have seen a long spell of low crude oil prices with the industry trying to predict when, and at which price-point the market would stabilize. While the oil markets in the last few months have seen prices rise from historical lows, there seems to be no sign of a quick return to higher crude prices in the near future. This new price reality has taken a toll on the project activity in Q1 2016, with the first quarter resulting in only USD 12.8bn in project spends. This is c.30% lower when compared to the project spends in Q1 2015 and a little below the average Q1 levels of the last 3 years.

While 2016 has seen a slow start to the year in comparison with 2015, a deeper analysis of the last year reveals how different the two years have been. Although both years witnessed project activity on the backdrop of low oil prices, the situation in 2015 was much better for several reasons. Many of the large project awards were spillovers from 2014, other projects were in far advanced stages with financing already secured and lastly, many project owners believed that the low oil prices were speculative and would rise in few months.

2016 on the other hand, has seen the new reality in oil prices set-in. With most project owners being in the consensus that prices are likely to stay depressed over the short to medium term, overall economics of projects now need to be looked into at lower price points. Keeping this in mind, Contax Partners analyzes the recent project activities of 2016, delving into countries and sectors of strong activity and concludes the article with what can be expected from the rest of the year in terms of project awards and spends.

"Analyzing the Q1 project awards, we see that pipeline sector accounted for USD 3.5bn while the power sector accounted for USD 2.9bn"

Analyzing the USD 12.8bn worth of projects that were awarded in Q1 2016, we see that c.USD 3.5bn took place in the pipeline sector, followed by c.USD 3.2bn worth of projects in the power sector. The largest awards of Q1 2016 included: KNPC’s LNG Regasification & Import Terminal worth c.USD 2.9bn in Kuwait and OPWP’s Independent Power Plants (IPPs) in Sohar and Ibri in Oman, each worth c.USD 1.2bn.

A country wise analysis reveals that Kuwait, Saudi Arabia and Oman have been among the top spenders with projects spends ranging between USD 3bn – USD 4bn each, whereas the remaining 3 countries in the GCC (Bahrain, UAE and Qatar) have seen projects spends in the range of USD 600 – 700mn USD each.

Looking at the future projects, a country wise analysis (Figure 1) reveals Saudi Arabia’s plans of being the top spender (with USD 32bn) accounting for 31% of the future spends in 2016. Saudi Arabia is followed by UAE and Oman, accounting for USD 18bn each, Kuwait with a planned project capex of USD 17bn & Bahrain and Qatar accounting for USD 9.3bn and USD 8.1bn respectively.

The below table shows some of the most anticipated and prominent projects (>USD 1,000mn) that are planned for award in 2016 in the GCC countries.

Table 1: Significant Projects due for award in GCC in 2016

A sector wise analysis of the top 4 sectors in the GCC region shows the dominance of power projects which constitutes USD c.23bn of the future projects for 2016, followed by water & waste accounting for USD 17.5bn, refining accounting for USD 15.6bn and oil & gas production, which contributes USD 13.6bn.

Due to growing high demand and industrial consumption for power, we see GCC countries budgeting a large share of their annual spends towards power projects. Additionally, due to the inclusion of Iran in the international crude market, we see GCC countries placing importance on sectors such as oil & gas production and refining in order to maintain market share. Interestingly, the petrochemicals sector however, has seen a steep decline in planned projects when compared to 2015. This is due to the recent regional shortage of gas which acts as the primary feedstock for the petrochemical complexes.

While an initial glance at the above numbers would reveal a story of optimism, a deeper look would reveal an interesting yet a less sanguine outcome. As mentioned in Table 2, a very large share of the future projects of 2016 are mega projects that typically have a higher propensity of delay. While the power, water & waste and oil & gas production sectors have a smaller proportion of mega projects, 90% of the projects in the refining sector are over USD 1,000mn. Given that many of these projects are expected to be awarded towards the end of the year, a delay in award could see overall spends drop further.

Table 2: Major refining projects due for award in H2 2016

Due to a sluggish start that the first quarter has witnessed, the remainder of the year is heavily dependent on the award of certain flagship projects. Project owners will be under pressure to award the projects which have been announced earlier that are imperative for the economy and success of the country.

"Contax Partners forecasts that only USD c.33bn worth of additional projects have a realistic chance of taking place through the course of 2016"

Looking forward, c.USD 102.5bn worth of additional projects have been planned for 2016. However, using Contax Partners’ Tiering methodology (where Tier 1 projects have a 70% or greater probability of going ahead and Tier 2 projects have a 30% probability of being awarded), Contax Partners forecasts that only USD c.33bn worth of additional projects have a realistic chance of taking place through the course of 2016. Thus resulting in an overall capex spend of USD c.46bn for the year. This number is also in line with the historical realization rate (30%) of GCC’s planned projects in the last five years.

Considering a scenario where all these projects are awarded as planned, 2016 will still see a lower project capex when compared to the last four years. However, if some of these projects do not go ahead this year, 2016 could be one of the worst years the GCC has seen in terms of oil & gas project awards.

Contax Partners can help project owners, contractors and suppliers evaluate the impact of dropping oil prices on the future projects market. Through its dedicated research team and detailed Tiering methodologies, Contax Partners can help companies evaluate which projects are likely to go ahead and which projects are likely to suffer delays. For more information on how to consolidate your position and take advantage of a slowing energy market, contact Ann-Marie Carbery at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Since our establishment in 1985, Contax Partners has been the advisor of choice for companies operating within the constantly evolving Middle East, Russia and Africa energy sector. Having operated in the energy market for over 30 years, we have a track record of empowering our clients to win business. Contax Partners is well placed to understand the challenges, and what impact these can have on your growth plans for the Middle East, Russia and Africa.